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After a year of tariffs and policy shocks, 2026 will be pivotal for the global economy. Can the post-pandemic economy grow sustainably if the geopolitical environment calms down a bit? Expect a year that is anything but dull for markets, as rapid artificial intelligence investment and adoption continue to dominate investor sentiment and trades.
Look for a “soft landing” for global growth, as world GDP rises by 2.8%, vs. 3% in 2025. Volatility will be the norm, driven by an economy often called “K-shaped,” where winners and losers drift further apart. Here is who will be up and down:
The U.S. economy will face a tug-of-war between a booming tech sector and the cooling job market. High-income households, buoyed by the stock market, will keep spending. Middle- and lower-income folks will pull back as the labor market softens. Spending on AI will prop up business investment and GDP. But if the “productivity boom” doesn’t materialize soon, fears of an AI bubble could upend global markets.
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Europe’s economy looks sluggish right now. But Germany is positioned for a big rebound. Expect eurozone growth of just 1.1%, but momentum will build toward year-end. Germany will perk up to around 1.5% growth, driven by massive fiscal stimulus and defense spending. Political uncertainty and strained budgets will put a damper on growth in France. The U.K. economy will shift to a lower gear with growth slowing, as domestic headwinds such as a cooling labor market follow this year’s trade shocks.
India will be the star performer in Asia next year. Expect growth of 6.4%, powered by domestic consumption as its massive middle class gains spending power. India will surpass Japan to become the world’s fourth-largest economy next year.
China will continue to decelerate, slowing to 4.5% growth. Beijing aims to curb deflation with its “anti-involution” to stop cutthroat price competition, but the property sector remains a drag. By contrast, Japan faces a tough balancing act of supporting steady but unspectacular growth while battling sticky inflation.
Growth in Latin America is set to slow down, as lower commodity prices, trade disputes and budget tightening weigh on most of the region’s economies. Interest rates likely won’t fall as much as investors are hoping. The Fed will cut, but not deeply. The European Central Bank will stay on hold, as inflation undershoots briefly in early 2026 before normalizing. Rates in the EU will likely remain at 2.0% through the year. The Bank of England will cut rates at least once in 2026. The Bank of Japan will be one of the few central banks hiking rates next year.
The greenback will likely weaken by around 6% against major trade partners by year-end, as the Fed cuts rates. But it won’t crash. The buck’s role as a safe haven will keep a floor under it, especially whenever geopolitical tensions flare up again.
This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.
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